Sat Nov 12 Weekly Roundup

After weeks of debate over US elections, the outcome shocked the global markets. After a jittery start to the week, the unanticipated win of Donald Trump as the US President, was welcomed by the major markets. The US indices registered gains of over 5% for the week, closing at record high levels in last five years.

On the emerging markets front, the US election results too boosted the market sentiments. However, the last trading day of the week, witnessed sell off. Asian markets stumbled as the rally in the dollar dampened demand for emerging market assets. Further, low visibility regarding the new geopolitical trade polices added woes.

On the commodity front, both crude and gold witnessed sharp plunge, and were down by around 6% each for the week gone by.

Back home, while the global financial markets are trying to gauge the outcome of the US presidential elections, India got busy assimilating Mr Narendra Modi’s announcement a before the US Election outcome. The announcement by Mr Modi to ban Rs 500 and Rs 1,000 notes weighed on many sectors in the stock market and kept Indian indices under pressure. Tanushree Banerjee too has written an interesting piece stating how this move will benefit stock markets and have an adverse impact on real estate. Here is an excerpt from the article:

Scrapping the Rs 500 and Rs 1,000 notes is not just a war on black money. It is a war on real estate prices as well. The asset class has been due for correction for long. But black money, which has been the panacea for the sector, allowed realty companies to revel in the froth. The resulting bubble had a cascading impact on home loans as well.

And as far as the stock market is concerned, brace yourself for a volatile ride. Initial feelers seem to suggest that the move is extremely positive for stocks in the long run and therefore, markets should register a strong gap-up opening. However, you never know. Out of sheer uncertainty of how the move will pan out, investors can also run for the exits.

As far as the long term outlook is concerned, there are two ways the stock market can benefit. First, from the very improvement in fundamentals this would lead to and second, there’s a strong possibility more money moves into stocks as black money investment channels dry up.

Key World Markets During The Week

Sectoral indices ended the week on a negative note with stocks from realty and consumer durable space witnessing maximum selling pressure. However, metal and bank stocks witnessed gains.

BSE Indices During The Week

Now let us discuss some key economic and industry developments during the week gone by.

In a move that surprised the entire nation, the Government of India (GOI) scrapped the 500 and 1,000 denominations notes. This indeed is a major move to curb black money and the effect of the same will be felt by the people hiding black money with them. When they would suddenly deposit huge chunks of money (i.e undisclosed income) in their bank account or exchange them, the banks will share their details of their Permanent Account Number (PAN) with the Income Tax Authority which in-turn can lead to scrutiny in relation to the source of the income. This decision is a very positive one from a stock market perspective. People will have to pay taxes on this unaccounted income in order for the money to be useful. Otherwise, the unaccounted money in the form of 500 and 1000 rupee notes will be useless. Once taxes are paid on these unaccounted sums, the money will become legal and a part of it will flow in financial instruments including equities.

We must commend the bold decision by Mr Narendra Modi to ban these notes. Despite the over hanging fear of losing vote bank, the government has taken this massive step to curb black money. It appears that the move to ban 500 and 100 denomination notes is certainly a move in the right direction.

Vivek Kaul has written an excellent piece yesterday explaining the economic as well as political reasons on why Mr Modi banned the Rs 500 and Rs 1,000 notes.

As per an article in The Economic Times, cCement manufacturers have moved to the Competition Appellate Tribunal (COMPAT) against Rs 67 billion penalty slapped by the fair trade regulator Competition Commission of India (CCI). This move comes after CCI slapped a penalty on 11 cement firms including ACC, Ambuja, Ramco and JK Cement as well as the industry body Cement Manufacturers Association (CMA) for indulging in cartelization in August this year. Besides penalizing the CMA, CCI had directed all the firms to cease and desist from indulging in any activity relating to agreement, understanding or arrangement on prices, production and supply of cement in the market. Tribunal had also set aside fine on the 10 firms imposed earlier. In this regard, some cement manufacturers have filed an appeal before COMPAT against CCI order. Also recently, the Rajya Sabha approved the amended Mines and Minerals Development and Regulation (MMDR) Bill, 2016. Rahul Shah, Co-head of Research explains how the amended law will be a big positive for cement companies.

And here are some of the key corporate developments in the week gone by.

In a recent news update, the war of words between the Tata camp and Mistry camp has intensified. Tata released a nine page statement during the week, accusing Mr Mistry of betraying the trust Tata’s had reposed in him and seeking to control the main operating companies of the Tata group to the exclusion of Tata Sons. The statement cited falling dividend income, increasing impairment provisions, ballooning debt and low return on investments as reasons for removing Mr Mistry as the chairman of Tata Sons. At Equitymaster, we had conducted a poll back in 2012. The objective was simple. We wanted to find out who our readers perceive as the most trustworthy corporate group in the country. After polling 4,657 readers, a clear winner emerged. With close to 56% of the votes, the Tata Group blew away the competition. Perhaps the results weren’t surprising. The name Tata has long evoked respect and trustworthiness. So how about changing the question a bit? How about ranking India’s business groups in terms of shareholder returns over the past few years? Here, the Tatas are a bit of a letdown. As many as seven of the nine largest listed Tata entities have put in a shoddy performance not even earning their cost of capital. Needless to say, the performance of the group under Mr Mistry was in question.

Steel Authority of India (SAIL) has signed a Memorandum of Understanding (MoU) on technical collaboration for operational improvements and human resource development. Reportedly, SAIL and POSCO have been in discussions to set up Finex-based integrated steel plant collaboration in R&D and energy efficient, environment friendly green technologies and waste utilization etc. Earlier this year, a South Korean delegation led by the mayor of Pohang visited Delhi in February and met with the then union steel minister Narendra Singh Tomar to discuss various areas where the two countries can collaborate and work together in the steel sector.

According to an article in Livemint, Nestle India is evaluating five new segments to enter over the next few quarters. The move is part of the company’s plan to reduce its dependence on Maggi noodles and get its existing portfolio of products back on the growth path. The company aims to leverage its research and development capabilities, science and technology and nutrition values in its products, to take on challenge from home grown companies like Patanjali. In calendar year 2014, Nestle India had revenue of Rs 98.54 billion. The company’s total revenue is still much below what it was before the ban. In the quarter ended 30 September, it reported revenue of Rs 21.90 billion. It was Rs23.32 billion in quarter ended 31 March 2015 (the quarter before the Maggi ban). The company is currently evaluating five new categories, Nespresso (a coffee machine), Dolce Gusto (a coffee capsule system), pet care, cereal and skin care. The company also recently entered the healthcare segment, while it has already started bringing out new milk products. Nestle may bring in new products from its global portfolio. As per the reports, the boards of Nestle India and Nestle SA, have agreed that there was a need to “accelerate the game in India”, which will require fresh investments in the existing portfolio, new products, renovation and innovation, with a quest to double revenue in India within four to five years.

And here are some of the key result updates in the week gone by.

Wockhardt Ltd posted a decline of 81.59% in its consolidated net profit at Rs 170 million for the second quarter ended September on account of a dip in sales. Net profit was Rs 924.5 million in July-September a year ago. Wockhardt’s total income on consolidated basis was down 13.41% during the quarter under review to Rs 10.64 billion as against Rs 12.29 billion in the year-ago period. International business contributed 59% of the total revenues during the second quarter of 2016–17. Wockhardt’s total expenses came in at Rs 10.02 billion, down 5.93%. In another development, Wockhardt has received its board’s approval for acquisition of 100% stake in Wockhardt France (Holdings) S.A.S. (WFH) (an existing step down subsidiary of the company) from Wockhardt Bio AG (WBG), a subsidiary of the company. With this acquisition, WFH shall become a direct wholly owned subsidiary of the company from erstwhile step down subsidiary. WBG continues to be a direct subsidiary of the company. The board at its meeting held on November 10, 2016 has approved for the same. The share price of Wockhardt has dropped more than 50% in last one year.

Sun pharma’s share price surged sharply after the company’s consolidated profit shot up 90.2% YoY to Rs 24.71 billion in the quarter ended September 2016, driven by operating income and lower finance cost. Revenue during the quarter grew by 20.2% to Rs 82.65 billion compared with Rs 68.73 billion in same quarter last fiscal. Also, revenue from US formulations, which accounted for 48% of total income, increased 9% YoY to US$ 555 million.

With the two new major developments on macro and domestic front, one can expect more actions and polices to unfold. This will continue to impact the market movements. But rest assured whenever the market crashes and offers strong opportunities to invest, we would certainly keep you posted. So do keep an eye out for updates from our end.

This article, authored by Equitymaster research team, was first published here.

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